CONTROVERSY OF TAXABILITY OF FEES FOR TECHNICAL SERVICES

TAXABILITY OF FEES FOR TECHNICAL SERVICES

There was a controversy relating taxability of fees paid to Non Residents for technical services in India, Hon’ble Supreme court in Ishikawajma case held that under Section 9(1) (vii) of the Income Tax Act, 1961 tax is levid only where services by a non-resident are not only rendered but also utilized in India. But apparently this view of SC was inconsistent with the provision, and later on the subsequent Explanation inserted by the Finance Act, 2008 was not sufficient enough to remove the continuous ambiguity in order to conclude the controversy, in result of which High Courts and Tribunals across the country differed in their opinion either by nullifying Ishikawajma and some accepted it. Finally, the Finance Act, 2010 resolved entire controversy, as the section clearly provides that U/s. 9(1) (vii) fees for technical services levidable even where services are not rendered in India utilization is sufficient for taxability.

Mumbai ITAT, for the first time after the Finance Act, 2010 in Ashapura Minechem v. ADIT takes the opportunity to examine the scope of the new Explanation, in this case the Ashapura Minechem (AM) entered into an agreement with a Chinese company (China Aluminum International Engineering Corp Ltd [CAIEL]) whereby AM agreed to pay a fee of $1 million in consideration for bauxite testing services performed by CAIEL. On issue of taxability of fee for technical services A M contended that it was not liable to deduct tax at source under s. 195, of the Act, because the principal sum of $1 million was not subject to tax under s. 9(1)(vii)as per the  decisions in Ishikawajma and Clifford Chance and it is also not subject to tax under the provisions of Art. 12 of the Indo-China Double Taxation Avoidance Agreement.

The Mumbai ITAT clearly turned down the contention and by observing that after the Finance Act, 2010, the Ishikawajma judgement do not continues to be good in law, the finance Act, 2010 resolved the entire issue of controversy of taxability and the retrospective amendment inserted by the 2010 Finance Act does not have any content of ambiguity.

Further the Tribunal held that the law in India is that fees for technical services paid to a non-resident by the resident is  taxable when such services are utilized in India, irrespective of the fact that  where they are rendered.

The Tribunal further stated that that there are three broad models of taxability of non-residents:

1.   Territorial Based Taxation: where taxability  is  only on income which is earned within the territories such country, it is followed in France, Belgium and the Netherlands;

2.   Source Based Taxation: It is applicable  where the source of income is located within the country imposing  tax;

3.   Residence Based Taxation: whereby the taxpayer is resident in the country levying tax.

Generally major states adopted a combination of source and residence based taxation,and in case of any dispute or conflict same is sought to be resolved under Double Taxation Avoidance Agreements (DTAA)  . In case where such DTAA is not between the disputing states, than such states may subject to such transaction which in issue.

Further Tribunal observes that it would not be appropriate to tax the transaction only on the basis of territorial nexus to a tax jurisdiction as contrary to prevailing International practice. And it is very much enshrined U/s. 9 of Finance Act, 2010 with retrospective effect.

The second argument was raised to whether the Indo China DTAA treat payment of fees for technical services differently.

As under the Art. 12(4) of the Indo China DTAA defines fees for technical services as “any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State…”

Art. 12(6), provides that “royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is … a resident of that Contracting State.”

A M argued that Art. 12(4) is a special provision under the said DTAA which is applicable to the services where they are both rendered and utilized in India.

The Tribunal clearly rejected the contention of AM by stating that such transactions are subject to tax under the provisions of the Art. 12(6) and noted that AM’s submission under Art. 12(4) would render Art. 12(6) meaningless

CONCLUSION: Now the ongoing controversy relating to taxability of payment of the fee to Non Residents for the technical services is resolved to a great extent. First the Amendment U/s. 9 further Mumbai ITAT sufficiently adopted the view that only utilization of the technical services is enough to subject the tax.